Should Home Sellers Hire an Appraiser?
Home sellers often ask me if they should spend a little extra money and obtain an appraisal from a professional appraiser prior to listing a home for sale. I can understand that sentiment, but unless the property is so unique that the listing agent cannot prepare a comparative market analysis, paying for a full-fledged appraisal might be overkill.
Why It May Not Help
- For starters, appraisers are like professionals in any profession, some are excellent and some could not find a property with two maps and a flashlight. Appraisals are not a guarantee of value. Sometimes, an appraisal is not even an estimate of value. In some states, appraisers might not have to be licensed. Unless a seller has first-hand experience with a particular appraiser, there is no way feel completely confident that the appraisal will be accurate.
- Appraisers can make mistakes. If the appraiser is unfamiliar with a neighborhood or its quirks that might detract from value, the appraisal might be incomplete. The method used by many appraisers to establish market value is to compare similar homes in similar condition that have recently sold. Sometimes, agents remove photographs after closing from MLS. If the appraiser hasn't viewed the interior of the home, the appraiser could unwittingly use a home in need of repair as a comparable sale to an updated home.
- Appraisers can't always find all of the required data. I probably receive at least one call a week from an appraiser asking me about my recent sales. The appraisers want to know if there was anything unusual about the home, whether the seller paid for the buyer's closing costs or if there were special concessions. Not every real estate agent is available to answer these types of questions and not every appraiser asks, plus top producing agents might not recall the details of every single transaction.
- Appraisers can differ on value from each other, even expert appraisers won't always agree. Ask 3 appraisers for an opinion of value, and you'll most likely get 3 different opinions. That's why sellers sometimes ask 3 real estate agents for an opinion of value and end up making the worst seller's mistake ever when they choose the agent who offers the highest price.
How Buyers Appraise Homes for Sale
Home pricing is part art and part science. When real estate agents prepare a comparative market analysis, we are trying to determine how much a buyer will pay for the home and the price at which the lender's buyer will appraise. These values can be two different numbers.
Sometimes buyers are very confused when shopping for a home. They generally compare values among homes they have toured, so they don't really know how to determine value when the only homes they see are homes for sale. They know what other sellers are asking for their homes, but they often do not know which homes in the neighborhood have recently sold and for how much.
If they are given comparable sales, buyers generally do not have enough appraisal knowledge to know how to adjust for variances between the homes. They might try to compare a home with a pool and upgrades to a home on a smaller lot without a pool and in need of work and have absolutely no idea how to compute the difference in monetary terms. To add insult to injury, their agent probably doesn't know, either.
For example, a buyer might be told that the home next door sold for $300,000. That would be enough to make the buyer believe that she should be able to offer $300,000 for the home for sale next to it. However, the home for sale next to that home might have an extra bedroom and bath, which would mean it could probably be worth more. How much more is an extra bedroom and bath worth? Buyers do not know.
Buyers often make a decision on price based on the competing homes for sale. If they tour a home that is an overpriced home, for example, that will make the reasonably priced homes look like a bargain. They might also ask their real estate agent how much they should pay, and the agent might say, for example, that the average sold-price-to-list-price ratio is 98%, so the agent might suggest a 2% price reduction.
Buyers should not ask a real estate agent how much to offer for a home. Most agents are uncomfortable suggesting an offer price since it is not their home and some of them, I hate to admit, are unqualified to answer. A buyer should ask a real estate agent to give the buyer enough information so the buyer can make an informed decision.
Other Reasons to Avoid Seller-Paid Appraisals
One of the main reasons a seller-paid appraisal prior to listing a home is likely to be a waste of money for the seller is due to the fact the buyer might not trust the appraisal. The buyer might think the seller persuaded the appraiser to arrive at a higher-than-easily-substantiated value because buyers are often suspicious. Buyers tend to feel suspicious because they are uneasy dealing in a foreign environment, more so than because anything is underhanded going on.
On top of this, the buyer's lender most certainly will NOT accept the seller's appraisal. The buyer will still need to pay a separate fee for an appraisal to obtain financing. Moreover, it is also highly likely that the buyer's lender might require an additional appraisal, just before closing, to check on the accuracy of the first appraisal. Because lenders are wising up to the fact that not all appraisals, especially since the implementation of HVCC, are accurate. Not to mention, since the market crash of 2008, lenders today realize a good appraisal is simply a good estimate of value and estimates can vary.
While a real estate agent's estimate of value is not an appraisal and should not be construed as such, generally listing agents can do a fairly good job of figuring out a listing price based on the comparable sales and market movement. It's one of the reasons we make the big bucks.